The demand for AI hardware continues to keep Asia's factories busy as the war in Iran takes its toll.

      In June, Asia’s manufacturing sector saw continued growth, largely driven by the global demand for AI hardware, based on survey data released this week. Strong interest in chips, servers, and data center equipment maintained full order books, despite rising energy costs and extended shipping times due to the conflict in Iran. This trend was most evident in China.

      The RatingDog General Manufacturing PMI recorded a score of 51.7 in June, marking the seventh consecutive month of expansion above the 50 threshold that distinguishes growth from contraction. High-tech manufacturing performed even better, achieving a PMI of 53.5, which significantly exceeds the overall figure. This disparity reflects the fact that production related to AI is advancing more rapidly than other sectors of the economy.

      Japan's manufacturing sector showed similar resilience, with its PMI rising to 54.8 from 54.5 the previous month, constituting six months of continuous growth, accompanied by new orders increasing at their fastest rate in over two years. Other smaller economies also recorded positive trends; the Philippines saw a slight increase to 50.9 from 50.8, Malaysia returned to growth at 50.7 from 49.9, while Taiwan and Vietnam also experienced expansion.

      The common factor across these regions is hardware. The rapid development of AI has transformed the demand for semiconductors, networking equipment, and server components into a significant driver, one that Asia is particularly well-equipped to supply.

      The PMI serves as a diffusion index, based on a monthly survey of purchasing managers assessing output, orders, employment, and prices. A reading above 50 indicates that more firms are experiencing growth than contraction, meaning that the June figures reflect overall direction rather than the magnitude of any recovery.

      In this context, the consistent increase across the region is as important as any individual figure. The alignment of growth indicators in China, Japan, Taiwan, Vietnam, Malaysia, and the Philippines indicates demand robust enough to withstand fluctuations in any single market.

      This robust demand has proven profitable for China, with export earnings nearing $500 million per hour, largely driven by AI-related products. This dynamic also allows one sector to counter the effects of geopolitical tensions; the surge in technology-related orders is providing a cushion against trade risks that could otherwise negatively impact economic indicators.

      However, this buffer is not free from challenges. Survey results indicated heightened price pressures, with supply shortages and shipping delays extending lead times as costs rose due to the conflict in the Middle East. Economists cautioned that the energy crisis associated with the war could worsen across the region in the coming months. A PMI reading reflects momentum, not sustainability, and that momentum can rapidly shift if input costs continue to rise.

      There is also a risk of concentration within this positive narrative. If growth relies too heavily on one demand cycle, manufacturers may find themselves vulnerable if AI spending decreases or export restrictions tighten.

      These restrictions are already altering supply chains. Regulations from Washington have pushed China’s AI chip initiatives away from GPUs toward custom silicon, which alters the production requests for the region's factories. Enforcement is becoming stricter as customs officers are stopping shipments suspected of circumventing these restrictions, including a recent $13 million AI chip seizure in Malaysia intended for re-export.

      Each enforcement action introduces friction, which will ultimately appear in the lead-time and price data that the June surveys have already highlighted. The demand is genuine, but the costs associated with delivering the necessary goods are also substantial.

      For manufacturers, the equation is clear: as long as data centers continue to place orders, production will remain ongoing, and the conflict will be seen as an expense rather than a shutdown. Whether this situation persists into the latter half of the year remains uncertain. June showed strong performance, but the very reports highlighting the AI surge also indicated approaching costs.

      Currently, Asia’s manufacturing sector is relying on chips to navigate these challenges, and the June figures suggest that this strategy is yielding positive results.